Arena Blog

How Cisco's manufacturing realities led to the death of Flip

As Cisco closes its “Flip Camera” chapter of history, it’s shutting down a 400 million dollar business, letting go of 550 employees and spending $300 million in restructuring costs.

But given the circumstances, abandoning Flip may just be the right choice for Cisco.

Since venturing into the world of consumer products and acquiring Pure Digital—the maker of Flip—Cisco has been hit with steadily decreasing profit margins in this segment as competition for portable video products has increased. And with the growing criticism that Cisco has spread itself too thin, it may just be time to refocus on what it does best—enterprise class networking solutions.

Purchasing Flip was a gamble from the start

From the beginning, Cisco’s purchase of Pure Digital for $590 million was met with mixed reactions. As Alex Henderson of Miller Tabak & Co. said, “There’s nothing else in Cisco’s portfolio that even looks remotely like it. It’s not a business that Cisco should have bought in the first place.”

But Cisco’s purchase of Flip was a larger part of its strategic venture into consumer products. The Flip was a smart purchase in that the Flip had incredible consumer appeal and promoted Cisco’s core business by encouraging people to put video on the web. Plus, the Flip was a cheap win—at least initially.

Since the Flip was the first product of its kind, it didn’t need high-quality video or advanced features to sell. The Flip was about getting video onto the web faster and easier than any other camera, so in a way the Flip was about connectivity—another plus for Cisco.

Unfortunately for Cisco, once the iPhone, Android, and other players began to enter the space fast accessible video was no longer a differentiator. Video quality and the ability to share became necessary ingredients that the Flip had to acquire, as well as the manufacturing ability to act as a consumer products company—quickly iterating as new technologies became available.

Low profit margins plus heavy competition forced Cisco’s hand

With the release of the iPod Nano, which shot video, the value of a Flip camera began to drop. Cisco responded by improving the video quality of the Flip, but once the iPhone 4 and other smartphones offered HD video, the Flip just couldn’t compete.

Why buy a pocket camcorder when you can buy one device that offers pictures, video, apps, internet, phone, and the ability for real-time social networking?

Since it was fairly impossible to compete with the disruptive technology and social capabilities offered by products like the iPhone, the other option for Cisco was to emerge as a high-end leader going toe-to-toe with Canon, Sony and others, which would also require a huge investment into manufacturing and supply chain talent.

For many manufacturers, decreasing product margins of an established line forces a decision—find lower cost suppliers, reinvest in upgrading the product or get out. As smartphones began encroaching on Flip’s territory, and profit margins for the Flip—which were already low compared to Cisco’s core business margins—began to drop, Cisco was forced to make a decision.

Perhaps a high-end Flip with wi-fi, hi-def video, a touchscreen interface, and a host of unique Flip apps would have been worth the investment, but it may have been an even more costly mistake. So after several quarters of poor results, CEO John Chambers announced it was time to refocus strategy and scope, saying “We are making key, targeted moves as we align operations in support of our network-centric platform strategy.”

Do your manufacturing competencies match your products?

Flip’s fall from grace is not an uncommon story; rather, it’s a large-scale, widely publicized example of a problem manufacturers face every day. When new products hit the market with little competition profit margins may start high, but as competitors emerge, they begin to drop. At that point, you can either find cheaper ways to manufacture your product, launch new and improved versions of your product or cut your losses.

In Cisco’s case, this problem was amplified because the sales and manufacturing competencies needed for making low-tech, fast production products are very different than the ones that Cisco has developed to become a leader in cutting edge, complicated networking solutions. Flip’s top competitors–Sony, Canon, Apple, etc.—all had the manufacturing chops to compete in the quickly changing consumer electronics market, but Cisco would need to drastically evolve its manufacturing strategy to keep up. Although this could have been attempted, the disruptive nature of smartphones made it not worthwhile to even try to build up that talent.

So even though Flip is still a top seller, Cisco’s growing pressure to improve its profit margins forced it to refocus on its cash cow—enterprise networking—and kill a 400 million dollar product line.